WASHINGTON-When Bush administration officials came to Capitol Hill earlier this week to make the case for a buyout of bad mortgage debt, Sen. Elizabeth Dole said she was skeptical of the plan. Then she looked backwards.
In 2003, Dole began sponsoring legislation to beef up weak government oversight of two key players in the housing market – Fannie Mae and Freddie Mac – warning that failure to fix the mortgage giants could lead to problems.
That prediction proved accurate. The government was forced to take over the two firms this summer, shortly after the passage of provisions Dole had been pushing for five years.
“This problem could have been resolved years ago,” Dole, R-N.C., told Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke at a hearing of the Senate banking committee Tuesday.
Over the last six years, Dole’s membership on the committee gave her a voice on a host of debates related to the current crisis, from the regulation of mortgage giants, to oversight of Wall Street investment banks and hedge funds and monetary policy.
With Congress mulling over a proposal to buy $700 billion worth of Wall Street securities linked to bad mortgages, many are now asking whether Congress and the administration did enough to prevent the current financial woes.
Dole’s role on the banking committee has come up as an issue in her bid for re-election against Democratic state Sen. Kay Hagan.
A review of committee hearing transcripts and bills Dole sponsored during her tenure show she was an early and sometimes lonely advocate for beefing up oversight of Fannie Mae and Freddie Mac, even after a series of accounting scandals revealed deep problems at both firms.
Financial analysts and economists say a lax regulatory environment helped the firms conceal substantial problems created by their purchase of massive quantities of risky subprime loans, a flaw that has hurt the broader economy.
The review of hearing transcripts and legislation she sponsored during her first term also suggests that Dole was more engaged in the mortgage giants’ troubles than she was in a host of other issues that analysts and economists say also contributed to the current woes.
A review of committee hearing transcripts shows Dole did not attend or did not speak- the transcripts do not make clear which – at several banking committee hearings during her first term.
The hearings covered banking and hedge fund regulation, oversight of Wall Street, problems in the subprime mortgage market, foreclosure prevention, and a few included discussions with the Federal Reserve chairman on economic issues.
Hagan’s campaign says her “silence” in those committee hearings shows a lack of commitment to those issues. But Dan McLagan, a spokesman for Dole’s campaign, suggested that argument reflected an overly simplistic view of the way Washington works.
“There are a lot of ways for a senator to influence regulatory policy and Sen. Dole takes advantages of many of those different options. Depending on the issue, raising it in committee may not be the most effective way of making change,” he said.
Fannie Mae and Freddie Mac have been key players in the housing market for decades. They buy mortgages from banks, package the mortgages together as securities, and sell them to investors or keep them on their own books.
Until a few years ago, the firms mainly bought mortgages that banks issued to the safest borrowers. But a few years ago, they expanded into the growing market for subprime mortgages. Their presence helped make it easier for many Americans to get loans – and drive housing prices up by bringing more buyers into the market.
The firms were private, but long operated with an implicit bailout guarantee from the federal government.
Because of that guarantee, Dole and a handful of Republican senators introduced legislation on several occasions to allow federal regulators to take a closer look at Fannie’s and Freddie’s books. The legislation gave regulators the power to force the companies to reduce risk by decreasing the number of securities tied to subprime mortgages in their portfolios and to require the companies increase the amount of money kept on hand to cover bad bets on subprime mortgages.
Both led to financial problems for the companies that led to the government takeover.
For years, the legislation went nowhere, though Dole and others raised the issue repeatedly in banking committee hearings.
“We need it now,” she said at a hearing in 2006. Many of those provisions passed this year, just in time for the government to take over the companies.
Senate Republicans have blamed Democrats for resisting the measure both before and after Congress changed hands in 2006. But Colleen Flanagan, a spokeswoman for Hagan, said that Dole’s failure to get it passed showed she was not an effective voice on the banking committee.
“She can sign her name on bills until she’s blue in the face, but if they didn’t go anywhere…it’s really no different than total inaction,” she said.
McLagan said the senator did everything she could to get it passed in the face of intense lobbying from the two mortgage firms.
“On what I think is universally seen as the major tipping point of the current crisis, Freddie and Fannie, she talked about it with regulators, staff, members of the administration, and used all private and public venues up to and including brining it up in committee hearings,” he said.
Fannie and Freddie sold many of the subprime backed loans to Wall Street investment banks, including many of the larger firms that have collapsed in recent months.
But whether the collapse of Fannie and Freddie was the major tipping point of the crisis is open to debate, financial experts say. The current problems had many fathers, including some unrelated to mortgages. They include lax oversight of investment banks and hedge funds, and the emergence of complicated financial instruments that, in hindsight, failed to accurately account for risks firms were
taking in non-mortgage lending.
“If Fannie and Freddie had not failed, I think we’d still have a financial crisis. That wasn’t the primary trigger,” said Rob Bliss, an expert in financial markets and a professor of business at Wake Forest University.